FIL seems to believe that the letter he signed isn't worth the paper it's written on?

And also we did borrow some money from him before he gave us this gift so we could buy a car (right before Christmas and DH needs one to get to work as no bus route) but we have already repaid this loan. Could he show that as us paying him back for the gifted money? He keeps a record of everything!

H had said to him before that if we were ever in the position to then we would possibly like to repay it, but we mean in like 10 years time not now. And we may never be in that position anyway.

I think the "terms" would be too uncertain to be considered a loan, particularly alongside the presumption of a gift between parent and child. A mere falling out in the future isn't sufficient to change the original agreement.

It's either a loan or a gift in law, there isn't any in between. In the absence of certainty of terms, and an intention to create legal relations, his claim won't be going anywhere.